A company uses 12,000 units of a component per year. The cost of placing an order is £50 and the annual holding cost is £3 per unit. What is the economic order quantity (EOQ)?
Answer and explanation
Correct answer: D. 632 units
- Step 1: EOQ = √(2 × Co × D ÷ Ch), where Co is the cost per order, D the annual demand and Ch the holding cost per unit per year.
- Step 2: = √(2 × 50 × 12,000 ÷ 3) = √400,000.
- Step 3: = 632.5, so about 632 units (rounded).
Answer
632 units.
Why not the others: 447 units: This omits the factor of 2 in the EOQ formula. 400,000 units: This forgets to take the square root. 38 units: This swaps the ordering cost and holding cost in the formula.
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